The education giant has sealed its return to financial health with quarterly adjusted profits at a three-year high and revenues back to 92% of their level before a crackdown on the training sector
- Since divesting its academic tutoring business, New Oriental has bounced back by developing new education ventures, beating market expectations for both revenue and profit in its latest quarter
- The results pushed its share price to a two-year high, prompting major banks to raise their target price for the stock
By A. Au
Two years after suffering a near-death experience, a market leader in China’s private education industry has roared back to life.
New Oriental Education & Technology Group Inc. (EDU.US; 9901.HK) was forced to rewrite its business model when the government outlawed its biggest revenue earner, after-school tutoring. But the company has found new ways of making money as an education provider, restoring its finances to a healthy state.
New Oriental’s latest quarterly earnings surpassed market expectations, as revenues reached 92% of their pre-crackdown level and adjusted net profit hit a three-year high.
Net revenues for the quarter to the end of August rose 47.7% to $1.1 billion, according to an earnings report released last Wednesday. New Oriental’s net profit soared 152% to $165 million, while adjusted net income on a non-GAAP basis, which better reflects the operations of its main businesses, jumped 126% to $189 million.
Investors welcomed the latest evidence that New Oriental has recovered from the existential crisis of two years ago. Its U.S. share price jumped 5.5% to $64.59 on the day of the earnings report, and advanced another 1.3% to $65.46 the next day, reaching its highest level since July 2021.
That was the month the Chinese government outlined plans to cut the burden of homework and after-hours tutoring for school students, unleashing carnage across China’s private education industry. In November 2021, New Oriental announced that its learning centers around the country would stop providing curriculum-related training services to students from kindergarten through ninth grade (K-9).
The abrupt amputation of a mainstay business generated tens of billions of yuan in costs for laying off staff and cancelling rental contracts, pushing the company deep into the red.
In its last results before the policy bombshell, New Oriental logged revenue of $1.19 billion for the quarter ending in February 2021. The latest quarterly revenue figure of $1.1 billion takes the education provider’s turnover back to 92% of the pre-upheaval level.
New Oriental’s adjusted profit of $189 million in the latest quarter was its best performance in three years, in line with the three months to the end of August 2020. Back then, New Oriental’s training service, without policy disruptions, posted an adjusted profit of $185 million.
After divesting its K-9 curriculum business, New Oriental has focused on tutoring and exam-related services that were not covered by the ruling, such as training students for college tests and overseas study. The company has also added new revenue streams from extra-curricular education, intelligent learning systems and e-commerce live streaming.
By the end of August this year, the company’s total number of schools and learning centers reached 793, an increase of 45 in three months and 87 more than a year earlier. Meanwhile, the company said its tutoring business for non-academic subjects was operating in nearly 60 cities, with about 438,000 enrollments in the last fiscal quarter. In addition, its intelligent learning systems and devices have been adopted in about 60 cities, with around 181,000 active paying users in the period, nearly double the 99,000 in the previous quarter.
In July, the company had projected net revenue for the three months to end August, the first quarter of its fiscal year, would range between $983 million and $1.01 billion, a year-on-year rise of about 32% to 35%. But the actual first-quarter result beat its own forecast, with revenue of $1.1 billion. Founder and chairman Yu Minhong said the company’s new education business was starting to make a major earnings contribution after more than a year of trial and development. Revenue from the new businesses doubled from the same period a year earlier, he said in the earnings statement.
The new ventures include the teaching of life skills and non-academic subjects such as storytelling, art, elocution, personal literacy, science and programming. New Oriental has recognized that middle-class parents in China want their children to develop a range of skills in addition to excelling in traditional subjects.
Higher price target
Meanwhile, the business of preparing students for overseas study has picked up since Covid-era travel controls were lifted. Revenue from New Oriental’s test preparation business grew 51.7% in the quarter while consulting services for overseas study rose 26.6%, in what Yu described as an encouraging performance.
Looking ahead, the company expects revenue for the current quarter ending in November to range between $785 million and $804 million. That would be lower than in the just-announced quarter but would mark a rise of 23% to 26% from the corresponding period a year earlier. The sequential drop is due to seasonal effects. Many college students spend the summer vacation preparing for exams such as TOEFL and IELTS, which test English language ability for university study abroad. Hence, the quarter to the end of August is typically the peak period for New Oriental.
The strong results prompted investment banks to raise their price targets for the stock. CICC said in a research report that quarterly revenue exceeded expectations, lifted by enhanced operating leverage, and the outlook for the full year looked bright. Although the expansion pace may slow after the summer season, the number of New Oriental schools and teaching centers was expected to rise between 15% and 20% in the full fiscal year, while revenue was projected to grow 30%, given a steady increase in the utilization rate. Therefore, the bank raised its price target for New Oriental by 12% to $75, with an “outperform” rating.
Macquarie noted that New Oriental had lowered its guidance for revenue growth in the second quarter ending November to a range of 23% to 26%, mainly due to a higher year-earlier base for its learning equipment business and e-commerce revenue from subsidiary East Buy Holding Ltd. (1797. HK). But the bank said another upside earnings surprise could not be ruled out, as the company has tended towards more conservative guidance and growth momentum in its new business remains strong. The bank maintained an “outperform” rating on New Oriental and lifted its Hong Kong share target price to HK$63.6 from HK$53, a potential rise of about 20% from current levels.
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